The rules of business reinvention

Andrew Curry writes: If businesses don’t learn faster than their external environment changes, then they decline and eventually die. And at present, the external environment is changing rapidly. It’s easy to see this in the world of digital technology, but it’s also true of the economic landscape and the deep mistrust now shown by consumers for business in almost all markets, in the resources shifts that are depleting natural capital, and in the deep shift of social values towards well-being, both individual and social.Businesses that reinvent themselves, then, are businesses that have noticed that the world is changing and are reshaping themselves in response.A couple of examples.

Microsoft’s decision to give away Office software on devices was surprising, given the history of the business, but the business logic was clear. In a world where users switch between multiple devices to complete the same task, and use tablets as business tools, Microsoft’s pricing structure looked old-fashioned and got in the way of its users. The risk was that people would start to use alternative products instead, learning how they worked and taking them back into the office environment.

In the US, CVS identified that the health market is growing and valuable, and that retail has a growing part to play in it. However, it was not a credible health provider while it also sold tobacco products. The short-term cost to the business: $2 billion in lost sales against a turnover of more than $120 billion. The medium-to-long term gain: a platform for a growing health services business.

In both these cases, reinvention took the form of shifting part of the proposition to change customer perceptions in a way that was in line with changing markets and changing expectations.

Difficult journeys

Some businesses have reinvention forced on them. McDonalds is on a difficult journey towards a being business that delivers healthy menus, contemporary restaurants, and sustainable sourcing. But it doesn’t really have a choice, against a background of changing tastes and declining sales, notably in the US. A decade ago, it was positioned to compete against Burger King. Now it is businesses such as Chipotle, once owned by McDonalds, that are taking share from it. The desire for reinvention is clearly there: the last CEO, Don Thompson, started the shift, but resigned because of poor results. There have also been missteps along the way (such as the “Mighty Wings”) when traditional ideas about how the business should compete resurfaced. The Board is ageing and narrowly-based. Meanwhile, Millennials eat there because it’s cheap, but would prefer to eat almost anywhere else, which is a fatal combination.

If McDonald’s is having a tough time reinventing itself, companies which didn’t start on the process struggle more. In the retail sector both Walmart in the USA and Tesco in the UK have experienced flat sales and poor profits because they have failed to respond to changing customer attitudes and the changing retail environment since the financial crisis.

In effect, other businesses have reinvented the sector around them. Companies such as Costco in the US and Mercadona in Spain have invested heavily in staff and training, treating their people as an asset rather than a variable cost. They have changed the balance of the business from a focus on choice and price to a focus on service and price, understanding why people buy as much as what people buy. In the UK, similarly, Aldi and Lidl have come out well from the financial crisis, but only part of that story is about discounting. It is, at least as much, about valuing their customers’ time and rewarding their interests.

The rules of reinvention

There are five critical aspects of reinvention:

It has to be future-facing, and therefore involves some element of risk. But if you wait too long, as in the case of McDonalds, you’ll always be running to keep up;

It has to be outward-looking, often looking at the business through a new pair of eyes or looking at what businesses who are not your competitors are doing;

It needs to focus on people, and more exactly, on some aspect of values, perceptions, expectations and behaviours that is changing;

It needs to identify a new pool of revenue that re-invention will give you access to, or an existing pool that it connects you to;

It needs to involve some change in your business model and customer experience that is tangible and visible.

In all of this, the brand is a golden thread that links these together, connecting changes in the wider operating environment of the business to its business model and the customer experience. Brand becomes a future-facing idea of the business that also embodies the story it tells its customers. The brand is the lever that helps businesses to learn.